This week, Amazon took its long tail strategy in a totally new direction, offering its Prime customers (those who pay a $79 annual fee for free 2-day shipping) a wide selection of streaming movies and television shows, for free. The move is a direct slap at Netflix, a company that started with a focus on renting hard-to-find, long tail DVDs but which has moved increasingly toward popular blockbusters as its video streaming operations ramp up. Amazon will not have nearly as many recent and popular releases in its free offer as Netflix, but for people who are open to Amazon's viewing suggestions it's hard to beat free.
While Amazon plays this creative offense, it finds itself ironically on defense in its core book retailing business. Even as traditional rivals such as Borders implode due to antiquated business models, the sleepy public library poses a threat. E-books are continuing their rapid ascent in publishing, and public libraries are moving quickly to offer patrons this option. Because the number to be lent is limited, library e-books are a poor alternative to Amazon for reading hot new releases, but they may be a cost-effective way for libraries to offer patrons access to hard-to-find books. Tellingly, Amazon refuses to make its Kindle e-book reader compatible with the format used for most public library lending. Public libraries do not have marketing muscle to make readers aware of this option, and they may move more slowly than Internet giants, but as Amazon knows with its video offering, it's hard to beat free.
There are three morals to this story:
- Long tail business models create new markets, especially if they can make experimentation with unfamiliar purchases easy and if they can leverage new purchase occasions. Amazon is doing both these things with its video offering, thereby expanding the overall size of the video streaming industry.
- Disruptive innovation occurs in unstoppable waves. Just as Netflix disrupted Blockbuster, Amazon disrupts Netflix. Just as Amazon disrupted Borders, public libraries disrupt Amazon. Market incumbents can try to delay disruption, as Amazon has done with its Kindle, but ultimately the new business model wins over a set of foothold customers that empower its further growth.
- To avoid being swamped by waves of disruption, companies should watch out for becoming vulnerable as they march up-market into blockbuster territory. As Netflix became increasingly focused on big hits, it exposed a flank for attack. The company is now facing a tough choice -- it can ignore Amazon's advance on the theory that it does not appeal to Netflix's most important customers, or it can create a parallel business model to defend itself. Given that Netflix's CEO Reed Hastings is a fan of disruptive innovation, we might expect the company to choose the latter course, but there are many executional and positioning challenges to overcome in the dual-track approach.
This post was written by Steve Wunker. Click for more of New Markets' thinking on business models.